Hedge fund fees hot topic at R.I. Investment Commission

Mike Stanton

Wednesday

Apr 24, 2013 at 3:23 PM

PROVIDENCE, R.I. -- Rhode Island has moved about $1 billion of its $7.6-billion state pension fund into hedge funds over the past 18 months, a move that General Treasurer Gina M. Raimondo defended against critics Wednesday in a meeting of the state I

PROVIDENCE, R.I. -- Rhode Island has moved about $1 billion of its $7.6-billion state pension fund into hedge funds over the past 18 months, a move that General Treasurer Gina M. Raimondo defended against critics Wednesday in a meeting of the state Investment Commission.

For the first eight months, the state paid nearly $16 million in fees.

Facing withering criticism from recent stories by a Forbes magazine blogger accusing her of rewarding Wall Street fund managers, Raimondo and commission consultants argued that the strategy will help cushion the pension fund from a stock market crash such as the one in 2008 that cost the fund $2 billion.

Had hedge funds been in place then, says Raimondo, the state would have lost $500 million less.

Hedges in such investments as currencies, agricultural commodities and precious metals are designed to move against the stock market, and provide a better alternative to lower-yielding bonds, argued Raimondo and other commission members and consultants.

But the high fees they charge -- generally 2 percent of assets managed, plus 20 percent of profits -- were criticized as "obscene" by commission member Marcia Reback, retired head of the American Federation of Teachers-Rhode Island.

According to figures provided to The Journal, the state paid nearly $16 million in fees to 19 hedge funds for the eight-month period ending last June 30. More recent figures were not immediately available.

Since its inception in November 2011, the state's hedge-fund portfolio has returned 7.72 percent.

Members and consultants for the state Investment Commission defended the strategy at Wednesday's meeting, saying it's been successful in reducing risk while generating positive returns.

Critics, including public-employee union leaders whose members saw their cost-of-living increases suspended in the 2011 pension overhaul law, say that the state could invest more safely and cheaply.

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